Ban futures trading in commodities?

Jun 30, 2006, 12.00 AM IST

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Yes, futures trading threatens food security

The wholesale price index (WPI) for all commodities has risen steadily through the first six months of this year, particularly of cereals, pulses, milk, edible oils and sugar. The prices of wheat and rice have reached Rs 15 and Rs 17 per kg respectively.

The price rise is continuing due to the inability of the government in checking the hoarding of commodities, the incidence of which has increased following the introduction of futures trading in them. Under the garb of economic reforms, the government has been encouraging speculative activities overriding the cautions from various quarters.

Due to wrong government policies the buffer stock of foodgrains is now perilously low and our food security is under considerable threat. In such a situation, many powerful players in the market such as private traders and stockists have started trading in commodity futures for earning huge profits.

This has brought the country to such a sorry pass. Stock barriers have been removed, thus giving a free hand to the black marketeers and profiteers. This is responsible for the spiralling inflation.

The government is now contemplating an adjustment in the duty structure to facilitate import of essential commodities like wheat, sugar and pulses in order to improve supply and contain the ongoing price rise.

Wheat is a prime example of the government's defective policies. The government's wheat procurement during 2006-07 looks unlikely to cross 95 lakh tonnes, the lowest ever since the 1997-98 level of 92.98 lakh tonnes.

Now, we are importing 35 lakh tonnes of wheat at very high prices compared to what the government is offering to our own farmers. Private traders including MNCs and their local partners have already procured 50 lakh tonnes of wheat.

This is clearly undesirable and will encourage hoarding and intense speculation in futures. The futures trading system is, thus, the most obnoxious weapon in the hands of a few traders which results in many crises and even threatens food security. Thus, trading in commodity futures should be banned without any delay.

Atul Kumar AnjaanMemberNCF*

(*National Commission on Farmers. He is also general secretary of AIKS)

No, it will impede price discovery

"No activity in the economic field is perhaps so little understood as futures trading on organised commodity exchanges", wrote the Forwards Markets Review Committee, headed by the internationally acclaimed agricultural economist Prof M L Dantwala, in 1966.

The recent knee-jerk reaction of some in the central government and many in the media to the rise in the prices of wheat, sugar and pulses is reminiscent of the truth of this statement.

Futures trading in these commodities is being blamed for price escalation in these essential commodities. Four decades ago, futures trading in most commodities was banned fearing that trading will fuel inflation. Is history repeating itself once again?

Commodity futures trading was revived towards the end of the last century, after a lapse of nearly three-and-a-half decades, in the wake of economic reforms and liberalisation following India's entry into WTO.

It was recognised that futures markets perform the economic functions of price discovery and price risk management. Futures markets do not actually determine prices. The basic forces of supply and demand set prices in both the physical and futures markets.

Futures markets only discover prices, and disseminate these widely for the benefit of producers and consumers, as also the government authorities so that the latter can devise appropriate trade and fiscal policies to correct the supply-demand imbalances.

When supply is short, prices are bound to rise, whether futures markets exist or not. The converse is true with surplus supplies. Stoppage of futures trading is no solution to the rising or falling price trend. With such stoppage, not only do we lose the valuable price discovery mechanism, but, also the risk management tool — so vitally needed to avert price risks.

Suspension of futures trading drives speculation to the physical markets, aggravating the rising or falling trends in prices. At a time when the last phase of Doha round of talks is about to end, and convertibility of rupee seems near, it is ironical that some are clamouring for the closure of futures markets in agricultural commodities.